Indian Markets Hold Out Once Again
Stocks with high profitability and earnings visibility will offer growth opportunities and investors should focus on earnings and not Trump tariffs
On Episode 553 of The Core Report, financial journalist Govindraj Ethiraj talks to Paul Hickin, Chief Economist and Editor-in-Chief at Petroleum Economist as well as Dipti Deshpande, Principal Economist at Crisil limited.
SHOW NOTES
(00:00) Stories of the Day
(00:50) Indian markets hold out once again
(05:33) Fear of owning US treasuries grips global bond traders
(07:57) Oil prices are now around $60 a barrel, what could happen?
(16:57) Reserve Bank governor is grilled on rupee even as Chinese Yuan continues to slide
(18:24) RBI lowers growth forecasts for the year to 6.5% from 6.7%
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Thursday, the 10th of April and this is Govindraj Ethiraj at the Core Broadcasting and streaming from Mumbai, India's financial capital. The top stories and themes.
The stock markets hold out once again as tariff wars kick in.
Oil prices are now around $60 a barrel. What's next?
The Reserve Bank of India's governor is grilled on the rupee even as the Chinese yuan continues to slide.
And fear of owning US tragedies is gripping global bond traders.
And the Reserve Bank of India lowers growth forecasts for the year to 6.5% from 6.7%.
The Markets Fight Back
The Reserve Bank of India cut the repo rate by 25 basis points from 6.25% to 6%. Now, that did not do much to the markets today, though possibly prevented a deeper fall, given that a full-blown trade war is now kicked off between the United States and China, with the US imposing a 104% tariff on Chinese goods into the US and China imposing a 84% tariff on US goods into China. The US has also imposed a 26% tariff on India, lest we forget. And there is hope that the Indian government's outreach without any retaliation, as is the case now, will lead to some compromise or in Trump's words, a deal.
Back to the rate cut. The markets had mostly priced in that rate cut as one of the many macro factors that are acting as positive counterweights to the negative news from around the world. On Wednesday, the indices closed lower, with the Sensex falling 379 points to close at 73,847, while the NSE Nifty 50 was down 136 points to close at 22,399.
In the broader market, the BSE mid-cap and small-cap indices also fell about 0.7 and about 1% each. Meanwhile, stocks with high profitability and earnings visibility will offer growth opportunities and investors should focus on earnings and not Trump tariffs, HSBC Global Research said in a note quoted by the Economic Times. The brokerage firm has picked five stocks, TVS Motors, Reliance Industries, Sriram Finance, ICICI Bank, Adani Ports, and Special Economic Zone, based on structural merits, arguing for them to do the trick.
If you want to know more about Sriram Finance and their strategy, you can look up the Core Report Weekend Edition and our conversation with the firm's managing director. The Nifty has fallen over 3% since US President Donald Trump assumed office on January 20. This year, HSBC sees limited impact of trade tensions on growth of Indian companies as low foreign holdings reduce the risk of further outflows and it also believes the macro risks have declined.
It is, however, highlighting concerns over high earnings expectations. Indian stocks are on pace to outperform regional peers by the most since 2009 thanks to the limited impact of the tariff trade war. The MSCI India Index is set to beat the MSCI's broader Asia-Pacific gauge by more than 6 percentage points this week, according to Bloomberg on Wednesday, adding that while tariff-induced sell-off in global markets has hit Indian stocks, local equities have shown more resilience than their peers, in part due to the country's relatively low exposure to the US economy.
Bloomberg also quoted Nomura Holdings saying that India is the least exposed to the US tariff shock and could benefit from the ongoing global supply chain shifts. India's reciprocal tariff rate is lower than some of its competitors and the country is a strategic ally to the US, they added, which may lure short-term trade diversions. Now, let's look at IndiGo and more of it because we did speak about it yesterday as well.
Now, IndiGo is India's largest airline and also ranks in the world's top 10. On Wednesday, it crossed US-based Delta in terms of market capitalization to become the world's most valuable airline, according to Bloomberg data quoted by Business Standard. Its stock price touched a peak of $5,262 and market capitalization of about $23.2 billion, little ahead of Delta's market capitalization of $23.1 billion. IndiGo operates about 15,768 flights a week, according to data by aviation analytics firm Sirium, which is almost 13% more than what it was operating in April last year. Speaking of Delta Airlines, the airline warned that revenue could fall in the current quarter and that growth has largely stalled as its CEO warned that he's concerned the economy, that's the US, is likely to fall into recession, according to CNN. Delta attributed the weakness in its guidance to broad economic uncertainty around global trade and it said due to the change in economic conditions, it is no longer standing behind previous guidance that it expected record profits in 2025.
It's also dropping plans to offer more seats to passengers later this year and it sees both business and leisure travellers pulling back on travel plans due to that uncertainty. When asked during an interview on CNBC on Wednesday if he still believes the US economy will avoid a recession, the CEO Ed Bastian said he's worried that is no longer the case. And here is the interesting part about what Delta CEO said, which is quite likely what most consumer-facing business leaders in America are thinking right now.
He said, and I quote, I don't know, I think we're acting as if we're going into a recession. I think everyone is going into a defensive posture as a result of that and if that continues and if we don't get resolution soon, we will probably end up in a recession. It also suggests that there is no business that is not affected by the tariff and trade war that's on and therefore what affects products will soon extend to services later if not sooner.
Bond Markets Are Facing Stress
Meanwhile, there is a sell-off happening in US treasuries. The yield in the US 10-year treasury on Wednesday overnight was seen 12 basis points higher at about 4.38%, while the 2-year was 4 basis points higher at 3.76%. Now, for bond investors, the sharp rise in yields is similar to the sell-off at the depth of the Covid meltdown when traders sold whatever they could to raise cash, according to the Wall Street Journal. Further increases in yields could add to pressure on economies already hit by rising prices and slowing trade due to tariffs. Investors say there is broad nervousness about holding long-term treasuries ahead of government auctions of 10-year notes on Wednesday and 30-year bonds on Thursday.
CNBC says that a new safe habit in play is Germany, which bucked the trend as its 10-year bond, seen as a benchmark for the eurozone, was trading 2 basis points lower. Shorter-dated bonds in Europe meanwhile rose in value. The yields on 2-year government bonds in France, Italy and Britain were lower.
Analysts told CNBC that one factor people are speculating about on treasuries is around the ongoing theme of a move away from the US dollar, of it becoming less trusted. If you follow that through, they said, one way that could manifest is structural holders of debt, reserve managers and China could move away from treasuries in response to policy moves from the US. They also said that secondary investors also appear to be taking a step back from US treasuries, typically seen as a traditional safe-haven asset given the volatile geopolitical climate.
Meanwhile, on Wall Street, stock futures extended their losses on Wednesday morning after US Treasury Secretary Scott Besson stated that the Chinese government doesn't want to come and negotiate, according to a report in CNBC, which also quoted him telling Fox Business News that they are the worst offenders in the international trading system and I can tell you that this escalation is a loser for them. Earlier Donald Trump, the President said levies on pharmaceutical imports will be announced very shortly and that's something that Indian pharmaceuticals industry and companies will obviously be watching for verily.
The Wall Street Journal dollar index has dropped about 0.6%, extending its decline from its Jan high. Deutsche Bank strategists warned on Wednesday that trading over the past week represents a simultaneous collapse in the price of all US assets that marks a step into uncharted territory, according to that report in the Wall Street Journal.
Oil Prices Continue To Fall
Oil prices fell for the fifth day on Wednesday to the lowest since February 2021 after the new reciprocal tariffs took effect including that 104% duty on Chinese goods and of course that return one of 84% on American goods into China. Brent futures were quoting around $60.70 on Wednesday and had lost a fair bit. Brent has stumbled over five sessions since those sweeping tariffs were announced.
One analyst told Reuters that the White House wants to drive oil prices closer to $50 as the administration believes that the US oil and gas industry can survive a period of disruption. Another analyst said that China's aggressive retaliation diminishes the chances of a quick deal between the world's two largest economies, triggering mounting fears of economic recession around the globe. China's 50 to 100,000 barrels per day of oil demand growth is at risk if this continues.
However, a stronger stimulus to boost domestic consumption could mitigate those losses, according to an analyst who spoke to Reuters. Now speaking of that $50 a barrel oil which is also a Goldman Sachs extreme prediction which forecasted that Brent could edge down to $62 by December 25, that's this year, and to $55 to $51 per barrel by December 26. Now we're already close to $60 a barrel.
I reached out to Paul Hickens, Chief Economist and Editor-in-Chief at the London-based trade journal Petroleum Economist, and I began by asking him about Goldman's extreme projection of $50 and what it could potentially mean for demand and supply and his overall outlook.
INTERVIEW TRANSCRIPT
Paul Hickin: Obviously, that's an extreme case. What's happening right now is that sentiment is running away from reality. What's happening is you're pricing in risk.
The market, the hive mind of the market, is pricing in risk. We saw that back when the Russia crisis happened about three years ago. Although it's the other side of the ledger, prices started running up to $130 a barrel.
It's when the reality started kicking in and people understood what was the actual reality of the situation, then prices started coming back down. We're in a situation now where there's a lot of brinkmanship, a lot of retaliation between China and the US that's hurting sentiment, that's hurting stocks. Everyone is looking at how much that's going to affect the global economy, recession risk.
We're talking about stagflation and that offer these fees into the oil demand situation. At the moment, demand projections are still holding up relatively well, but the market is certainly factoring that that's not going to be the case further out. When you are careful of catching falling knives, and that's why you've got this Goldman Sachs prediction of $40 as an extreme case.
I think what we're really looking at, remember, we're still in the 60s. We're still in a situation where it's pretty much not necessarily a sweet spot, but still fairly okay for producers and consumers. It's when it starts dropping below that $60 barrel, and certainly there's a big threat of that happening quite quickly, that that starts to really buy all producers.
Then on the flip side, it's obviously better for consumers. That's what Donald Trump has been talking about in terms of inflation, that's going to bring down inflation. Plus, obviously, the negative side of that is economic weakness will also bring down inflation.
A lot of moving parts.
Govindraj Ethiraj: We're looking at two kinds of things. One is, of course, demand slowing down, and the other is supply. OPEC has already said that it's going to increase supply.
Now, between the two, what is playing a bigger role in the way people are perceiving the likely trajectory of oil prices?
Paul Hickin: Realistically, this is all demand driven right now, I would say. I think the OPEC situation has certainly exacerbated the situation, but I think it's more complicated for OPEC+. Remember, you've got to understand maybe why OPEC plus may be doing this.
Partly, it's to do with bringing in from certain core members of OPEC plus to bring others into line. The compliance within the group to the deal has been patchy at best, poor for some. Certainly, the fact that Saudi Arabia has had to carry a lot of the burden has probably weighed on their shoulders a lot and trying to get the poor compilers back into line.
In some ways, it could be, if you get better compliance to the deal, then maybe OPEC plus will be in a better position to provide a floor once this turbulence dies down. At the moment, it's very little OPEC plus can do, even if they were to bring extra. Well, they could.
In an extreme situation, they did it before during COVID, how much they brought off the market, but I don't think they're in a position to do that again this time. I think it's a case of letting this whole drama play out, which is pretty much on the very much demand side. We don't know whether any deals will ultimately be struck here.
Then you've got the backdrop of all this, what happens when you have prices at a certain level, if they settle down at a certain lower price, whether that starts to choke off supply, especially non-OPEC supply, which was a big threat for OPEC in the first place. People talk about the US or Brazil, Canada, and that will start to dry up quite quickly if prices continue to fall.
Govindraj Ethiraj: What's the point at which people, let's say, rein in production or cut back on production or even start idling wells and so on? I mean, recent history, what does that tell us?
Paul Hickin: Everyone has their own break-even here, but what we'd say is that the national oil companies, like the OPEC producers, can produce at a very low cost. There's not a concern for them. There are more issues around balancing their budgets and their fiscal demands, which for Saudi, it's up at $90 a barrel.
For some others in the Middle East, it's lower. But at the same time, that's more of a long-term concern. You can balance budgets anyway over a few years by other means.
So it's not necessarily a completely guiding force for them. And then you've got the key producers like the US, which is around $45, $50 a barrel, which is where break-evens start happening. But you would probably start getting quite close to that where fiscal discipline is still a very important part of the US production profile because most of them are owned by oil majors and returns for shareholders are key.
So they could start quickly shutting in if prices... And even in this environment, where there's a lot of economic uncertainty, a lot of price volatility, that makes all businesses, and especially oil businesses, very reluctant to do as much business. So there's a lot of wait and watch, both from an industry perspective and a market player perspective.
Govindraj Ethiraj: If you were to look ahead in the next few months, so while, of course, we've got this big tariff question weighing on the global economy, and there are trade wars which have started off, what are the other factors that are playing on the oil market and potentially oil prices, which we need to be looking out for, or at least keep them on our dashboard, so to speak?
Paul Hickin: Yeah, it's a great question because the fog of tariffs and the trade war seems to dominate every inch of Column Inch and every podcast, every media hit. But you're right, there are a lot of moving parts of this. You've got potentially other threats like sanctions, sanctions on Iran, which could take potentially a million barrels a day off the market.
Yes, with sanctions, there are workarounds for sure, but at the same time, that's certainly a factor in the market as well. Also, the fact is lower prices themselves have their own impact. What's the cure for low oil prices?
Low oil prices. So while it might not be in the interim, that period, you've still got to look out that, like we were just saying, lower prices down to $50 a barrel, $55, starts to really choke off supply at that point. That's the other side of the bledger when we talk about when the market looks up.
Because remember, we've got a lot of sentiment, a lot of risk in the market, but what is core plays out in the market over time is fundamental, supply versus demand. Demand at the moment is the one where we're going, well, let's revise our demand forecast back, how much you're actually going to be buying up oil, but then you look at the other side of where the supply growth is going to come from. When you start seeing potential for non-OPEC supply being choked off, that leaves OPEC plus with a hand to be dealt and a hand to be played.
While it's certainly bringing back barrels now, two, three months, six months down the line, it can look very different. When this trade spat settles down, and when prices settle down, OPEC plus will have decisions to make and we'll have choices about where it can influence prices and provide a new level of stability.
Govindraj Ethiraj: Paul, pleasure speaking to you. Thank you so much for joining me.
Paul Hickin: Thanks very much.
The Reserve Bank Faces Grilling On The Rupee
The Reserve Bank of India governor was grilled on Wednesday by several journalists on what the Reserve Bank would do if the Chinese Yuan were to depreciate and thus get dragged into a currency battle within the trade war. The governor was of course non-committal on the currency in general and where the rupee was going specifically, except to say that the Reserve Bank only intervened in extreme situations. Meanwhile, the rupee declined to a three-week low on Wednesday, tracking the weakness in the Chinese Yuan, closing at about Rs.
86.68 per dollar, down 0.5% during the day, and hit a three-week low of Rs. 86.71 earlier in the session, according to Reuters. Meanwhile, Reuters also reported that China's Yuan ended at its weakest level in more than 17 years on Wednesday after its offshore counterpart fell to a record low overnight, thanks to the escalating trade war.
The onshore Yuan finished the domestic trading session at 7.34, which is its weakest close since December 2007. Despite the tariff pressure, China's central bank has said that it will not allow sharp Yuan declines and has asked major state-owned banks to reduce US dollar purchases, according to the Reuters report, which also quoted Capital Economics, telling clients that unless they roll back, the latest US tariff hikes mean that China's shipments to the US will more than halve over the coming years, even assuming the RMB weakens to 8 to the dollar.
The Reserve Bank Scales Back Growth Targets
The Reserve Bank of India Governor Sanjay Malhotra on Wednesday said that more than inflation, the central bank is concerned about the impact of US tariffs on growth. During a post-monetary policy press conference in Mumbai, the Reserve Bank had lowered the growth forecast primarily because of tariff-related uncertainties. Earlier, the Reserve Bank's bimonthly Monetary Policy Committee decided to lower its GDP growth forecast for 2025-2026 from 6.7% to 6.5%. Inflation projections were also lowered from 4.2% to 4%. The Governor also hinted at another reduction in key policy rates by changing the central bank's stance to a commodity from neutral, which may further also lower EMIs for consumers, according to the Business Standard report. He also said that amidst this turbulence, the US dollar has weakened appreciably, bond yields have softened significantly, equity markets are correcting, and crude oil prices have fallen to their lowest in over three years. He also said, and something business leaders have been saying, that first and foremost, uncertainty in itself dampens growth by affecting investment and spending decisions, both of businesses and households.
Second, the dent on global growth due to trade frictions will impede domestic growth, and third, higher tariffs shall have a negative impact on net exports. I reached out to Deepthi Deshpande, Director and Principal Economist at Ratings Agency Crisil, and I began by asking her what were the key takeaways from the Reserve Bank's rate cut and what impact it could have in the near to medium term.
INTERVIEW TRANSCRIPT
Dipti Deshpande: See, the trade shock has unsettled the global landscape quite a bit and it's really the spillovers when it comes to the Indian economy that we're more concerned about because we remain a domestic dependent economy. It's not the direct impact as much, but more so what can happen out of these crossfires. And I think in this situation, what's required is that policy remains vigilant to understand the magnitude of the hit or even to seize an opportunity if required.
And also, it requires policy preparedness. So, if you look at today's monetary policy, I think what was very clear is a reflection of the fact that there is an uncertainty and there's also this constant shadow looming over us all the time of what could happen to weather, for instance. So, I think there's a nice way to put it.
If you look at it, there's a 3C approach. So, there seems to be confidence in the inflation trajectory because it's revised down its forecast by 20 basis points on CPI inflation. And that's backed by the assumption of favourable agriculture output, lower global prices, etc.
The second C is the caution on the growth front because its growth forecast is down 20 basis points as well, assuming there are some trade concerns, etc. But it also derives comfort from the domestic drivers that will support growth. And the third C, the way I look at it, is a cushion for the economy through policy support, because that can come in by lowering interest rates.
And a key thing to note really is that despite these downward revisions on growth and inflation, the growth inflation mix remains favourable. So, lower inflation, which durably now is going to be around the central bank's target of 4%, at least for the next 12 months on an average basis, opens up policy space for further rate cuts. We expect two more rate cuts.
I mean, net, I think lower rates are growth positive. And they deliver a cushion to growth if global shocks are going to be much harder than expected.
Govindraj Ethiraj: So, you talked about spillovers. So, one spillover or set of spillovers we can clearly see is that which is impacting industries who are exporting. It could be apparel, it could be jewellery, it could be pharmaceuticals if those tariffs are announced in the next day or so.
As an economist, what are the kind of spillovers that you're expecting or bracing for?
Dipti Deshpande: Right. So, see, I think regardless of this, you know, we've seen a number of global shocks over the last two to three years, and we're looking at a very simplistic but clear framework. What are the linkages that the Indian economy could have via say capital flows?
What could it have via exports? And what it could be via input costs? Now, when you look at this simplistic framework, there are direct linkages or direct impact or an indirect impact.
The direct impact is, of course, like you said, what exporters face from US demand getting slower or weaker. But then there's also the demand for weaker global growth. And I think that is more concerning because it's not just the US that we export to, but the EU is also a very large trade partner.
Asia in itself is a large trade partner. Weaker China will also have implications on the rest of Asia, for instance. On the indirect part, what's important is, for instance, what happens if China has surpluses tomorrow?
If those surpluses get pushed onto the Indian economy via cheaper inputs, that's beneficial for our manufacturers. But if it comes in through intermediate cheaper imports of intermediate goods or finished goods, then that's where this is. The government will have safeguards in place up to an extent, but I think that's where we need to worry about.
Besides the real economy, I think the first line of hit so far has been capital flows and the rupee. And the nervousness in global financial markets is what we need to really brace ourselves for. From an external account position, we've been maintaining the fact that the external account vulnerability for India is quite low.
We're in a safe spot today because our forex reserves are ample, external liabilities are low, etc. But yet I think this is a massive shock and we need to, like I said earlier, be vigilant on what these linkages and impact could be.
Govindraj Ethiraj: Let me come back to the interest rate cut. This is the second one and in a pretty short time. So what is the impact that this could have more specifically in the near to medium term, even as we speak of more cuts?
Dipti Deshpande: So this policy had two sides to it. Number one was the second consecutive 25 basis points rate cut and there was a change in stance. Now what the change in stance does is that it tells us for sure about two things.
One is there will be no rate hike here. There will be a rate cut in the base case. And at the same time, it also allows the RBI to go in for a policy where they don't do anything at all.
Now that could be a situation where they want to sort of wait and watch how the transmission is going through. So see, rate cuts take time to percolate into the economy via lower lending rates and at times it also requires a nudge by the RBI. So they could use some policy space or some policy meetings to really bring about that nudge.
However, I think our expectation is that singularly the impact of lower lending rates on growth is more likely to materialise in the second half of this fiscal. But meanwhile, we shouldn't also forget that there are some other supporting factors. Lower inflation, the tax reliefs that got announced in the budget, etc.
and better agri incomes. These are expected to start supporting growth in the meanwhile. And I think lower interest rates when they work their way into the economy will provide that required lift and hold up consumption growth, at least in the short term.
Govindraj Ethiraj: So you talked about nudge and I'm assuming this would be the second time the Reserve Bank would nudge banks to reduce the actual cost of borrowing. So I mean, are you getting a sense that transmission is good, it's slow or it's delayed?
Dipti Deshpande: It's too early. I think we just started in Feb and it's now and they have a mix, you know, they can not just use, like we always say, there are three tools that the RBI has been or the MPC has been employing for a while. One is the rate action, the other is liquidity management and the third is communication.
So let's wait for all these three to play their role and then I think we can talk about lending rates. It's typically the case when the RBI starts cutting rates, it's a little sticky on the downside. So it's too early to say that, you know, it's rigid or whatever.
I think we need to give it some more time.
Govindraj Ethiraj: So you're saying usually it's two to three quarters before you start seeing any evidence of?
Dipti Deshpande: Yeah, it's two to three quarters. That's right. Yeah.
But then in case of impact on growth, like I said, there are other factors at play as well. So it's going to not be as easy to pull that impact out.
Govindraj Ethiraj: In a very broad sense, I know consumers are also maybe slowing down on loans because the Reserve Bank has been tightening risk weightages and so on. But what's your sense of the demand side? I mean, assuming, let's say, the nudges happen and the transmission happens, how is demand looking to you very broadly?
Dipti Deshpande: See, I think the demand, we should look at numbers. If you look at the FY25 growth rate, the sharp pickup in private consumption growth was also led by a very low base of the previous year. So we certainly cannot expect growth to be that high year on year.
But I think if you look at private consumption growth, the trend rate of growth is about six and a half percent. So even if we get about six and a half percent growth in private consumption, that's fair and that's healthy. So I think driven by these factors, like I said earlier, there is confidence.
There's confidence that agri incomes are strong. There's confidence on the impact of some of the tax reliefs. So, you know, tax cuts.
And I think that will benefit. In fact, in an analysis that some of my colleagues from the industry segment did, they went and highlighted, for instance, which are the segments which could benefit out of these tax cuts. They added another element to it.
Which of these within the middle income segments have relatively moderate or low penetration? One of them turned out to be washing machines. So I think washing machines, air conditioning, real estate, some of these do have the opportunity or the chance to do better this year.
Govindraj Ethiraj: So any takeaways from the overall body language of the Reserve Bank's announcement and their interactions today or rather on Wednesday?
Dipti Deshpande: The rate cuts, it was an apt environment because you're seeing lower growth, but you're also seeing lower inflation. So that gives them a window, like I said earlier. But other than that, I think overall, if you read the note and if you hear the statement, it gives you confidence on how domestic drivers are expected to pan out.
But it also highlights some caution. And I think acknowledging both of these in this environment is good because it gives some predictability on what exactly is the RBI looking at, you know, number one, number two, number three, before they take any monetary policy action. So I think it brings in a little more certainty, if I may say so, in this very uncertain environment.
Govindraj Ethiraj: Dipti, thank you so much for joining me.
Dipti Deshpande: Thank you.
